Homes generally increase steadily in value, unlike
riskier investments that can become worthless virtually overnight. A
home may not earn spectacular returns like some other investments, but
owning a home is less likely to show dramatic declines often associated
with stocks and other investments.
Owning a
home also provides unique income tax benefits. Mortgage interest and
property taxes are deductible. When owners sell their principal residence,
the profits of up to $500,000 are excluded from tax on capital gains.
Stock dividends are subject to income tax, and profits on the sale
of stocks, bonds and other investments are subject to a 20 percent
federal tax rate for most investors.
Another benefit to homeownership is leveraging.
A buyer can purchase a home with a cash down payment that is only
a small fraction - as little as 10 percent or less- of the total purchase
price, but the return is based on the total value of the property.
This is called leveraging an investment, and it makes the rate of
return on a home much greater than on an equivalent investment where
the buyer must put up the entire purchase price. Here's how it works.
If a buyer makes a down payment of $10,000 on a $100,000 home and
the home's value increases to $105,000 during the first year of ownership,
the home owner's equity (the value of the home minus any mortgage
debt) has increased from $10,000 to $15,000. That's a 50 percent increase
in just one year. |